Has the Petrodollar Had its Day?

Abstract

The petrodollar came into existence in 1973 in the wake of the collapse of the international gold standard which was created in the aftermath of World War II under the Bretton Woods agreements. These agreements also established the US dollar as the reserve currency of the world. The Nixon Administration understood that the collapse of the gold standard system would cause a decline in the global demand for the US dollar. Maintaining demand for the US dollar was vital for the United States’ economy. So the United States under Nixon struck a deal in 1973 with Saudi Arabia.

Under the terms of the deal, the Saudis would agree to price all of their oil exports in US dollars exclusively and be open to investing their surplus oil proceeds in US debt securities. In return, the United States offered weapons and protection of Saudi oilfields from neighbouring countries including Israel. For the Americans, the petrodollar increases demand for the dollar and also for US debt securities and allows the US to buy oil with a currency it can print at will. In 1975, all of the OPEC nations agreed to follow suit. Maintaining the petrodollar is America’s primary goal.

Everything else is secondary. However, as the US dollar continued to lose purchasing power, several oil-producing nations began to question the wisdom of accepting increasingly devalued petrodollar for their oil exports. Several countries have attempted to move away from the petrodollar, or already moved away. Examples include Iraq under Saddam Hussein, Iran, Syria and Venezuela.

Additionally, other nations are choosing to use their own currencies for oil like China, Russia and India. This paper will deal with the actions, incentives, and related consequences that the United States has created through its attempts to maintain global hegemony through the petrodollar. It will examine the latest challenges facing the petrodollar and how the petrodollar system influences the United States’ foreign policy. The paper will conclude that the petrodollar has had its day and that it will be a matter of time before it becomes redundant with huge repercussions for the US economy and the global economy.

Keywords: Petrodollar, Yuan, Reserve Currency, Inflation, Federal Reserve